Adam Ozimek, Chief Economist at the Economic Innovation Group, joins the podcast to discuss his latest proposal to reform and replace the high-skilled immigration program in the U.S. (better known as H-1B). In addition to immigration policy, the group discusses remote work, the softening of recent economic data, and the prospects for the year ahead. Finally, the group goes around the horn with its recession probability for the next 12 months.
Adam Ozimek, Chief Economist at the Economic Innovation Group, joins the podcast to discuss his latest proposal to reform and replace the high-skilled immigration program in the U.S. (better known as H-1B). In addition to immigration policy, the group discusses remote work, the softening of recent economic data, and the prospects for the year ahead. Finally, the group goes around the horn with its recession probability for the next 12 months.
Guest: Adam Ozimek – Chief Economist of the Economic Innovation Group
Adam Ozimek's research on high skilled immigration: https://eig.org/exceptional-by-design%20/
Hosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, and Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s Analytics
Follow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedIn
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Cris deRitis and Marisa DiNatale. Hi, guys.
Marisa DiNatale: Hey, Mark.
Cris deRitis: Hey, Mark.
Mark Zandi: This feels like a daily event, this podcast thing.
Marisa DiNatale: It is.
Mark Zandi: What's going on?
Cris deRitis: We were just on yesterday.
Mark Zandi: Yeah, that was a good one, wasn't it?
Cris deRitis: That was a great one, yeah.
Mark Zandi: We had John Carney of Breitbart on. Boy, the Trump Whisperer, it was actually quite interesting.
Cris deRitis: Absolutely.
Marisa DiNatale: [inaudible 00:00:41].
Mark Zandi: Would you agree? We didn't have chance to... We typically do the podcast, the guest leaves because we have to come up with a title, which is very painful process to come up, it's the most painful thing we do for this podcast. And we don't want to put the guests through that torture. And then we kind of talk about the podcast a little bit and we didn't have a chance yesterday, I had to run off. So what'd you think? I really thought it was pretty interesting, pretty cool conversation. No?
Cris deRitis: It was. I think it was too short. We need a part two. Yeah.
Mark Zandi: Really?
Cris deRitis: Yeah, there was a lot more to unpack.
Mark Zandi: Oh, we're going to have him back, though. We're going to have part two.
Cris deRitis: Yeah.
Marisa DiNatale: That's what we need.
Cris deRitis: Part two, yeah because there was-
Marisa DiNatale: It was good to get that perspective. We don't often get that perspective, so it was really good to hear it.
Mark Zandi: You mean kind of the conservative-
Marisa DiNatale: Yes.
Mark Zandi: From the Trump Administration.
Marisa DiNatale: Yeah.
Mark Zandi: Yeah, yeah, and he did a good job at explaining it. So, good. Oh, yeah. I thought it was a wonderful conversation and good. And it was also good timing, right? Because we had Robert Reich, the former Labor Secretary under Clinton, who's a very strong liberal, progressive voice, I should say, and on before. And he was great too, I thought he was fantastic, so.
Marisa DiNatale: Yeah,
Cris deRitis: Yes, absolutely.
Mark Zandi: Yeah, two good podcasts. A lot going on in the economic front but before we kind of dive in here, let me bring in our guest, Adam Ozimek. Adam, how are you?
Adam Ozimek: I'm great, Mark. Always glad to be here and see you guys again.
Mark Zandi: Yeah, and Adam is the Chief Economist at the Economic Innovation. I got that right? Economic Innovation Group, right? Yeah, EIG.
Adam Ozimek: That's right.
Mark Zandi: I keep saying EIG, and before, but your real claim to fame in my eyes is, we used to work together.
Adam Ozimek: That's right.
Mark Zandi: You were at Moody's for a number... How long were you at Moody's?
Adam Ozimek: Five years.
Mark Zandi: Five years. Yeah, we did some really good work, some classics.
Adam Ozimek: Great stuff, I'm very proud of a lot of the stuff we did there. [inaudible 00:02:41].
Mark Zandi: Yeah, on productivity growth and aging. I remember that one. You did a lot of-
Adam Ozimek: Still underappreciated, very underappreciated paper, I think.
Mark Zandi: Totally. Totally underappreciated, yeah. Maybe we should try to update that, get the data and try to update and re-release and take another crack at it.
Adam Ozimek: We used ADP data at the time.
Mark Zandi: Yeah, right, right. Yeah, maybe we can. I'll knock on Nela Richardson's door and ask her if she'd be willing to fork over that data.
Adam Ozimek: You should, you should, and we should try to publish it this time because that's the only thing.
Mark Zandi: Yeah, I agree.
Adam Ozimek: Things get seen by economists, apparently.
Mark Zandi: I agree, I agree. And how long have you been at EIG?
Adam Ozimek: Three years.
Mark Zandi: Three years. Three years, and a lot of good work there. And we're going to dive into that because you did a study on immigration and immigration policy, and obviously that's top of mind in the context of current economic policy being made in Washington. And I thought it was great paper. I will admit-
Adam Ozimek: Thank you.
Mark Zandi: ... it was a lengthy paper, so I did use NotebookLM to help out. And not to plug another podcast, but that damn NotebookLM has pretty good, it turned it into a pretty good podcast.
Adam Ozimek: Can't argue with that.
Mark Zandi: Yeah, and pretty compelling. I guess, they're bots speaking. I don't know.
Marisa DiNatale: Oh, this is the podcast where it's all AI generated that you're talking about.
Mark Zandi: It's AI generated.
Marisa DiNatale: Yeah, I haven't listened to it yet, but I've heard about it.
Mark Zandi: The one thing, do you use NotebookLM, Adam? Do you use it?
Adam Ozimek: I have, I have before. I don't use it regularly.
Mark Zandi: You don't use it regularly. One thing I wonder about is, I do generate a podcast every time I use it and sometimes the podcasts are like 10 minutes, yours was 30 minutes. I think that's the longest podcast generated so far, at least in my limited experience. And I don't know if there's any correlation between what the AI values and the length of the podcast or why is 110, 130? I don't know.
Adam Ozimek: Let's assume it's correlated with quality. That's the only thing, must be.
Mark Zandi: Quality, quality. Yeah, absolutely. And just to point out, you're also the very... You go all the way back to the first, I think it was the first guest we had on this podcast, back nearly four years ago. You were the first we had.
Adam Ozimek: That's right.
Mark Zandi: And as I recall at that time, the burning issue was remote work. And you had been doing a lot of good work on trying to understand the consequences, the economic consequences of remote work. And you were a, correct me if I'm wrong, this is four years ago, but you were a strong proponent of remote work, thinking that it would help to enhance labor productivity. Here four years later, a lot has transpired. The sentiment around remote work has kind of shifted back to, you got to be in the office, kind of thing. What's your sense of things now? Have you been following it? What do you think? Have your views shifted in any way?
Adam Ozimek: Yeah, I mean, it's important not to confuse the data for the vibes on this one, because the CPS now measures it every month. They measure remote work, it's part of the household survey, and it hasn't gone down over the last few years. If anything, it's moving up. You've got full time remote work is around 11%, and hybrid remote work is around 12%. And those have moved up maybe a percentage point or so each over the last two years. So, there's no sign of this mass return to office in the best data that we have. And I think those are pretty substantial numbers.
You hear, I was on a panel a year or two ago about place-based economic stuff. And then all day, everyone's talking, manufacturing this, manufacturing that, manufacturing this, manufacturing that. And then one of the panelists was like, "Remote work, it's really a marginal thing. It doesn't really affect that many workers," and I had to tell everybody, there are as many full-time remote workers as there are manufacturing workers in this country at this point. So, this is not a marginal phenomenon, it is a major economic phenomenon. And then that doesn't even include the hybrid, which are another 10 to 12% on top of that. So, it doesn't seem to be going anywhere and I think that speaks to the productivity effects and the amenity value that workers place on it.
Mark Zandi: Yeah. So, 11% of the workforce, this is from the current population survey, the household survey, is fully remote work. And I think that's higher than the share of jobs that are in manufacturing, I think at this point, or maybe it's close.
Adam Ozimek: I think it's pretty close. Yeah, I think it's-
Mark Zandi: Pretty close, yeah.
Adam Ozimek: ... about 10% manufacturing.
Mark Zandi: Have you seen any good recent research trying to measure the productivity impacts? I mean, I've seen studies on both sides of this. It's lifting growth, it's restraining growth, had no impact. Is there kind of a meta, do you have a meta perspective on the productivity impacts?
Adam Ozimek: I do. So, almost every time that you dig into one of these negative productivity result papers, what you find is a pre-existing sort of firm market failure. Right? You have a pre-existing problem.
So, Emma Harrington and Natalia Emanuel, great economists, had this great study looking at a company that had a bunch of office buildings and workers scattered throughout the office buildings. And some people worked alongside their teams pre-pandemic, and some people worked in different buildings pre-pandemic. And so the pandemic happens, everyone goes remote, and now you have this exogenous source of relative increase in remoteness, right? And so it's a great study, it's really well identified. And they found a decline in productivity, but the reason that they found a decline in productivity was because when you put a senior worker and a junior worker near each other pre-pandemic, the senior worker would help the junior worker improve. Okay, and post-pandemic, that doesn't happen. And they investigated at the firm, why doesn't it happen? And for the senior worker, it actually would hold back their productivity pre-pandemic to help the junior worker.
So after the pandemic, they go remote, the senior workers get a little bit better, the junior workers get a little bit worse. The net impact is negative, but what does that tell you about the firm? The senior workers have no incentive at the firm to mentor. It's just that so happens when you place peoples next to each other, they do that sort of mentoring informally.
Mark Zandi: Just to be nice, yeah, yeah.
Adam Ozimek: Just to be nice. And so I see this and I say, okay-
Mark Zandi: I do that all the time with these guys, Adam.
Marisa DiNatale: Remotely.
Cris deRitis: [inaudible 00:09:22].
Mark Zandi: Remotely.
Marisa DiNatale: And successfully.
Adam Ozimek: But this isn't, that's a firm failure.
Mark Zandi: Actually, I don't. They're on their own, totally. They're totally on their own.
Adam Ozimek: No spillovers.
Mark Zandi: No spillovers.
Adam Ozimek: But that's a firm failure, pre-pandemic. You had these people doing something that was literally so important to their jobs, it was holding back their own productivity, it was costing them. And they see these people, their pay goes up afterwards because the senior people, they're working hard, their pay goes up. So it's pretty substantial impacts and it's a managerial failure that should have been fixed beforehand. And so, I think you're observing these kind of stresses and tenses where things that are really imperfect become stressed by remote work. And in the long run, these are things we'll figure out, right? Like okay, we need a more explicit compensation for managers to be mentoring. It should be part of their quarterly reviews. We should keep track of it.
You see similar things with knowledge spillovers as well. In office, A lot of knowledge spillovers are sort of occur like informally. Oh, you need to know this, go talk to that person. Oh, go see this person, I think they were here for that project. I don't remember who was here, then go talk to this person, they've been at the company. That's so crazy informal, right? That shouldn't be the case. And so I think that firms are going to adapt their management practices to be more formalized, in terms of these sort of spillovers. And that is going to be productivity enhancing when they actually do the work to do it. It shouldn't be the case that you need to walk around the office tapping on people's shoulders to find out who worked on a project and what did they know about it, right? We should be formalizing this information sharing.
Mark Zandi: Yeah, totally. That makes total sense to me. And I can see it in our own business. I mean, we now intentionally design research projects so that we allow for senior people to work with junior people across the globe. And obviously, you couldn't do that in person. There's just no way someone sitting in Pennsylvania is going to be able to work with someone in Prague or in Sydney or in Singapore, but we can do that remotely. And that way, I think it improves the product that we're producing, the research results we're trying to achieve, but also accomplishes that mentoring aspect of what needs to be done to make sure that the future is also sound. That it's not only about today's productivity, it's about future productivity growth. But I think you're absolutely right, we're all adapting. We have to adapt to this, adapt to it.
But we didn't ask you to come on and talk about remote work, although we certainly could talk about it, but I do want to go back to immigration. But before we do, you're also a great economist and there's a lot going on in the economy and we got a lot of data this week. And Marisa, I'm going to put you on the spot. Anything you want to call out in the data? I mean, we got GDP, we got initial claims from unemployment insurance, we got consumption spending, PCE deflator, consumer expenditure, home sales. It was a big week, and the big story behind it, I think, but let me turn it over to you. You want to give us a rundown?
Marisa DiNatale: Yeah, there's a lot every day. This morning, we got spending data. Real spending fell half a percent month over month, which is a-
Mark Zandi: Consumer spending.
Marisa DiNatale: Consumer spending, which was quite a large decline. The same time, we got personal income, nominal personal income, which rose almost a full percentage point over the month. So we have strong income data, but decline in spending. Nominal spending fell, so it's not just an inflation effect. Nominal spending fell and we got stronger inflation over the month.
The PCE deflator came out, as you said, this is the Fed's preferred measure of inflation. That was in line with what we were expecting, given what we saw already on CPI and PPI. So, that rose 0.3 percentage points over the month point, 0.3% over the month. Same with core, same measure with core, 0.3. The year-over-year ticked a little bit lower because of the base effect from the comparison of last year. So, we're looking at 2.5% year-over-year now on PCE growth, and 2.6 on core PCE. So still half a percentage point above where the Fed wants to see it.
We got the second read on fourth quarter GDP, there wasn't a revision to that. So, that GDP figure holds from where it was previously reporting.
Mark Zandi: 2.3.
Marisa DiNatale: So that's 2.3% annualized in the fourth quarter.
Just a couple other things that sort of interested me. Jobless claims came out yesterday on Thursday. This is something we're watching because of course all the layoffs at the federal government, perhaps, right? Some of this is tied up in court now, so it's kind of a little bit difficult to get a gauge on how many people are actually losing jobs. But jobless claims did rise, they rose by 22,000 over the week, but none of that really looks like it's related to DOGE or federal layoffs. That looks like all to be in the private sector in states where it wouldn't be intuitive that you'd see things directly tied to the federal government. Claims are still low at 242,000 a week, nothing to worry about yet, but it was a bigger pop than we've seen in claims week over week. I don't make too much of that yet. That said, I won't be surprised to see this rising as we move through the next few months.
And then I guess we got a lot of housing data too. So we got some measures on house prices. We got new home sales, mortgage applications, pending home sales, other than prices, all very weak, right? So, price growth is still looking like somewhere in the realm of 4.5% nationally, however you measure it year over year. But home sales fell, pending home sales fell, mortgage applications fell. So, housing market looking really weak in terms of just-
Mark Zandi: Sales.
Marisa DiNatale: ... sales transactions, yeah. Did I miss anything else? Oh, did we talk about the conference board yet?
Mark Zandi: No. Do you know [inaudible 00:16:00]?
Marisa DiNatale: Yeah, but that happened when? Or earlier this week, I guess.
Cris deRitis: Tuesday.
Marisa DiNatale: Yeah, and Mark, you sent a email pointing this out-
Mark Zandi: I did.
Marisa DiNatale: ... to some of us. You were very worried by this. So, the conference board's-
Mark Zandi: A little flare went off with that report, in my mind.
Marisa DiNatale: Yeah, the conference board's survey of consumer sentiment-
Mark Zandi: Confidence.
Marisa DiNatale: ... fell quite a bit. It is quite low. I mean, it's like now it's kind of post-pandemic low again. And this was a month over month, pretty sharp decline. So the overall index went from 105 to 98 over the month, and most of it was expectations about the future over the course of the next year. And there's also this, just like University of Michigan, conference boards asks about inflation expectations, what consumers expect the rate of inflation to be a year from now. That jumped from 5.2% to 6% over the month from January to February, so.
Mark Zandi: I didn't catch the, in that report, I often look at the so-called labor, I guess it's labor market differential, jobs easy versus hard to get. Did you look at that?
Marisa DiNatale: I did. I mean, that actually narrowed a bit. So on the jobs front there wasn't-
Mark Zandi: There wasn't any.
Marisa DiNatale: People thinking jobs are plentiful, kind of stayed the same. People thinking jobs are hard to get rose a tiny bit, but if you look at the last few months, it's not out of range where it's been in the last four months. So nothing, people don't seem to be that worried specifically about the labor market. It seems to be more inflation based worries going forward.
Mark Zandi: Okay, so blizzard this stuff, add it all up. What's it say about economy in early 2025?
Marisa DiNatale: I mean, I think it looks shakier, but I don't think... The hard data is still okay. It's more sort of this soft Adam, as you call it, vibe, data, stuff from the consumer confidence surveys, inflation expectations. Looking at the stock and the bond markets have looked a bit shaky over the course of the last week. But the hard economic data, I just don't think we've had enough of it yet to fully reflect some of the softer data.
I mean, I think the labor market, just given what's going on with DOGE, right? I certainly expect softening there, and I'm not going to be surprised to see UI claims keep rising. But consumers still look okay. I mean, the consumer spending data was bad, but that could be seasonal, that could be a one-off kind of thing. Income still looks strong, so I'm not super concerned about that one month of bad data.
Mark Zandi: Well, at the very end of this podcast, I'm going to come back around and ask for your probability of recession. We haven't done that in a while, just to sum it all up. But Adam, you heard Marisa's kind of take on the data. Anything you want to flesh out or highlight or call out? And I'm most obviously interested in your broader take on what's going on here as we make our way into early 2025.
Adam Ozimek: I think what we're seeing really is just the delayed effect of... We've got, interest rates are above the neutral rate, that's my belief. I believe we're still above the neutral rate. And if you think that that's true, none of this is mysterious. Job growth just gradually decelerating, right? And so the more it decelerates, the more you get these signs of kind of weakness in the economy and you start to see early indicators. And I just think, what is it, 4.25 to 4.5 right now?
Cris deRitis: Yep.
Mark Zandi: Mm-hmm, the funds [inaudible 00:19:51].
Adam Ozimek: Are, I don't think that's the neutral rate. I don't think we're there yet. I think that it's taking a long time for things to work for the inflationary pressure that we had to finally work its way through the economy. I think we made the mistake of raising expectations, raising people's expectations of inflation, and that's the kind of toothpaste you can't put back in the tube quickly, so it's taking a little bit longer to ring that out. That plus, it's not like deficit spending has gone back to normal either. So, everyone talks about ARP, but it wasn't just AARP, right? It was ARP and then it was debt forgiveness and it was-
Mark Zandi: You're saying the American Rescue Plan, the COVID relief plan? Yeah.
Adam Ozimek: Yeah, there's a tendency to look at the fiscal stimulus is being something that happened in March of 2021 and since then, well, how can we still be talking about it? But it wasn't just that. I mean, There was a lot of student debt forgiveness, there were things like the rent moratorium that put money into people's savings, and deficit spending remains higher than it was before the pandemic. And so when you have that kind of pressure and you have the inflation expectations pushed up, it's just taking a while for interest rates to sort of push the economy back to normal. And I think that we're mistaking a slow return to normal for a higher neutral rate, and I don't think that's the case. I think the neutral rate is probably higher than it was pre-pandemic, but I don't think we're there yet.
Mark Zandi: Sp, do you have a sense of it? So we're at four 4.25, 4.5 on the funds rate, that's down 100 basis points, a percentage point from where it was at its peak in late last year. Do you have a sense of what the neutral rate is?
Adam Ozimek: That's the, I'm enjoying the liberty of not being involved in economic forecasting anymore. I don't have to do that.
Mark Zandi: Yeah, I was just curious.
Adam Ozimek: I don't have to do that anymore, but I don't think we're there yet. And I think that a lot of it comes down to productivity growth. And if you think that... I hear people say, "Well, productivity growth is much stronger now than it was before the pandemic, and so the neutral rate should be higher." But that only works if people believe that, right? Productivity growth pushes up the neutral rate because businesses think that the return on investment is going to be larger, households think their real wage growth is going to be larger, and therefore, both spend, right? Businesses spend and invest households spend and invest. And so that pushes the demand for savings up and the neutral rates higher, right?
But if you and I and all the economists in the room say, "Oh my gosh, productivity's 2%, it's up now," but if people don't believe that, if businesses don't believe that and households don't believe that and it's not affecting your expectations, it's not going to affect the neutral rate, right? Not until productivity growth stays up high enough to convince everybody. And so I don't think everybody's convinced yet. So even if productivity growth is higher, I don't think it's really pushing the neutral rate up that much.
Mark Zandi: And just to reminder for everybody, we've talked about this a lot on the podcast, but the neutral rate is simply put, the rate at which a interest rate policy is neither supporting or restraining economic growth. And you're saying the current rate is higher than the neutral rate, therefore it's restraining growth. So you're saying growth is slowing, but no big surprise, the interest rates are high, relative to where they should be to be neutral, is what you're saying?
Adam Ozimek: That's right, that's right. And I think you can see in the... If you look at the construction sector, does this look like a sector where we're at sort of neutral, right? That the current rates are consistent with the kind of long run activity we need there for a healthy economy. Housing starts are coming way down, everyone you talk to, maybe this isn't true for you guys, but everyone I talk to in the construction industry is fairly panicked. Construction-
Mark Zandi: They're panicked about the tariffs is what they're panicked about.
Adam Ozimek: And they weren't happy before that either. I mean-
Mark Zandi: True.
Adam Ozimek: So it doesn't seem in aggregate-
Mark Zandi: And immigration, which we'll come back to. They're worried about that too, as you know better than I. The industry relies very heavily on immigrant labor, so yeah.
Adam Ozimek: Yes. So if you look at the aggregate, I don't believe neutral rates as high as it is. And then if you look at more micro stories of like, okay, here are interest rate sensitive industries, do they look like they're at an equilibrium? I don't see that. They seem like they're dealing with activity. It can't go on like this, it can't sustain. And I think if rates don't come down further, we're going to see more signs of stress in construction and other [inaudible 00:24:27] industries.
Mark Zandi: For the record, and I don't want to go down this rabbit hole, but just for the record, we estimate the neutral rate to be 3.75%. So we're in the camp, it's above equilibrium but within spitting distance, I guess, I would say. But you're right. Cris, what do you think?
Adam Ozimek: I mean, a percentage point above is, that's still-
Mark Zandi: Well, I guess about a half a point above, about a half a point above.
Adam Ozimek: Yeah.
Mark Zandi: Right? Where four... well, half a point to three quarters of a point above, yeah. Cris, what do you think about the economic, what's the economic data say about the economy's performance and what do you think about this broadly? I've got a view too, obviously. I'll express it after you express yours.
Cris deRitis: Sure, sure. Yeah, so my view, I echo some of Marisa's sentiments here about just the increased fragility in the economy. That's what I see, just consumers, businesses just on edge for a variety of reasons, right? There is the higher for longer interest rate that Adam points out that continues to have a grinding effect, particularly on some subsegments of the economy as we think about lower income households in particular.
But the hard data, if you will, suggests the economy is still performing, the labor market is still delivering. There are some signs of potential weakness here, but the weakness in spending this month is after a pretty strong December, right? So you have to look through the entirety of the data here. And so right now, the trajectory is still, I would say fairly solid, but there are definitely lots of potential fissures here. And I think that frailty, that fragility is showing up in certainly some of those confidence measures. And if we're not careful, then they will show up increasingly in the hard data as well. Spending goes down, investment goes down, unemployment starts to rise. That's not my forecast just yet, but there's just so many uncertainties here that it is having a chilling effect.
Mark Zandi: Yeah, my sense is the economy's stepping down pretty meaningfully, in terms of growth. I mean, last year, calendar year '24, GDP was, growth was 2.8%. That's real GDP growth, it was a little over 2% in the fourth quarter. And Marisa, you said it wasn't revised, so it was still, I think it was 2.3%. And just got hot off the presses, we do the tracking estimate for GDP based on all the incoming data. And we got, as we were talking about, a lot of incoming data. You didn't mention the trade data by the way, the trade data came out.
Marisa DiNatale: Oh yeah, I didn't.
Mark Zandi: Yeah. Now, that showed a big increase in imports probably related to the tariffs, my guess. So that probably overstates the case, but we're down to 1.2% on Q1 GDP growth. Now, some of it is perhaps tariff related, the pulling forward of imports. Part of it might be, I agree with you Adam, I think rates are high relative to equilibrium. I think that's playing a role. The timing though feels, the step down was too big to be simply a rate that's above equilibrium. Kind of felt too nonlinear for that to be the case. But anyway, I think that's a playing role.
I also think it's got to step down by definition, right? Because last year we got, and the year before, a lot of labor force growth that allowed the economy to grow more quickly without generating inflationary pressures. But now. Immigration is way off, and again, we're going to come back to that in a minute. And labor force growth must be slowing and therefore if we don't get some step down in growth, we've got another problem, inflationary problem.
But in my view, my sense is that the big thing that's playing a role here is uncertainty, policy uncertainty. You can see it in all the surveys, you can see it, the NFIB survey, you can see it from corporate earnings. When CEOs get up and CFOs get up and talk about their earnings, they're talking about economic policy and just trying to figure out what's going on. And it's intuitive. I mean, look at the tariff policy, it's all over the map. It's on again, off again, China, Canada, Mexico, which products over how long, what period of time? These things are highly uncertain. It's DOGE, it's kind of the haphazard way about cutting jobs. I mean, I think it's very disconcerting for not only people that are working in the federal government, but all the private sector folks that cater to the government through goods and services they provided to the government.
And just more broadly, I think people are watching this and saying, whoa, this is very unnerving. And then, I don't know if this is seeping into the collective psyche yet, but it will, is we got the potential for a government shutdown in two weeks. It feels like a real possibility to me. And then we've got the Treasury debt limit coming this summer, and that's definitely not playing in anyone's thinking, but that will be playing in everyone's thinking in the not too distant future.
We're going to be in the middle of a pretty, I think knock down, drag out battle over the Treasury debt limit. So it just feel... and immigration policy, all the things going on with a regulatory policy. It just feels like everywhere there's, everything's up in the air, and if that's the case... And even the Fed's saying it. The Fed's saying, "Look, I'm not going to cut rates any further until I get clarity around economic policy. I'm going to sit on my hands." That's what they said, that's the message I took from the minutes from the last meeting, is that we don't know how this is all going to play out and what it means for inflation and growth. So we're just going to sit on our hands for here for a while.
I think increasingly, businesses and consumers are doing the same thing. It's not that they're cutting that would be recession, but they are sitting on their hands and that's much weaker growth. So I think I worry about that. I mean, that's why I sent off the yellow flare. And the thing that the line between a slowing in growth and recession is simply sentiment, how people feel. People lose faith and that goes to the consumer confidence measures that you mentioned, and start packing it in and stop spending. We're done. We're going to get into that self-reinforcing negative cycle. I'll stop there. Adam, I'll turn back to you. Any comments on what I just said?
Adam Ozimek: Yeah, I think it's possible. It seems a little early for me to see uncertainty, really moving the economy that much. And I'm always cautious around January to be over-interpreting changes. And so I don't really see the sort of step down in activity. It looks more to me like a sine wave towards slower growth and slow recovery, especially given as Marisa pointed out, some of the strong data that we still have.
So, but that said, I think everything that you described happening will happen. I think that tariffs and uncertainty are bad for growth. I think it makes the Fed's job so much harder. You hear this excuse that, well, tariffs are a price level shock and the Fed's just going to look through that. And it's like, that's easy to do when inflation is 2% and you know where the neutral rate is.
Mark Zandi: Good point.
Adam Ozimek: But when inflation is above 2% and you don't know where the neutral rate is and the Fed's playing very on edge with whether they're going to cut or not, that's the last time you want to price rate shock, price level shock. They can look through it if they can tell what it is, but there's no guarantee they're going to be able to tell what it is, given the huge amount of uncertainty that's going on. So, terrible timing for that. I think it does risk delaying rate cuts that we otherwise would have. I think it's bad for investment.
So, you look at measure the VIX, and I think it's not too surprising we're seeing pullback in the stock market. I think the uncertainty is real. I just don't think it's really affecting most business and consumer investment decisions yet, with the exception of maybe actually driving the imports up as people try to get ahead of the tariffs.
Mark Zandi: Yeah. Yeah, interesting. And a great point about the Fed in uncertainty. Okay, let's do this, because we're here. Let's play the game, the stats game, because that might flesh out some of the data. And then we're going to come back and talk about immigration and the work that you've done there, Adam, in the policy proposals you've put forward.
The game is, we each put forward a stat. The rest of the group tries to figure that out through clues, deductive reasoning, questioning. The best stat is one that's not so easy we get it immediately, but one that's not so hard, we never get it. And if it's apropos to the topic at hand, and I'm not sure what that is, but so that gives us a lot.
Marisa DiNatale: That feels wide open.
Mark Zandi: It feels wide open, yep, it feels wide open. All the better. So Marisa, we always start with you. What's your stat?
Marisa DiNatale: My stat is 614.
Mark Zandi: 614. Ooh, is it data that came out this week?
Marisa DiNatale: Yeah.
Mark Zandi: Government data?
Marisa DiNatale: Yeah.
Mark Zandi: New home sales?
Marisa DiNatale: Nope.
Mark Zandi: That would be 614,000. How many new home sales were there?
Marisa DiNatale: I think it was like 620,000, or actually,
Mark Zandi: 620,000.
Marisa DiNatale: I think like six-four. There was a four in it, wasn't there?
Mark Zandi: I thought there was a four in it, yeah.
Marisa DiNatale: I think there is, and maybe it's like 624.
Mark Zandi: And you're known to play with the game a little bit. Take license with it.
Marisa DiNatale: Oh, we're bringing that back up, are we?
Cris deRitis: Oh, gosh.
Mark Zandi: 14, 614,000. What's the difference? I meant 614,000. No? Okay, so-
Marisa DiNatale: This is 614,000, and it's not housing related.
Mark Zandi: Not housing related, okay.
Marisa DiNatale: It is something I mentioned in my rundown.
Mark Zandi: Not in the conference board survey. No, there wouldn't be anything there. Would it be in the conference board survey? No.
Marisa DiNatale: No, and this is a government survey.
Mark Zandi: Oh, yeah. Government statistic. Adam, any ideas here?
Adam Ozimek: I'm terrible at this game.
Mark Zandi: Really?
Adam Ozimek: I'm terrible at this game.
Marisa DiNatale: That can't be true.I can't be.
Mark Zandi: Oh.
Adam Ozimek: Yes.
Mark Zandi: Okay, I guess we'll just have to play kind of standard game. GDP is it in the GDP number?
Marisa DiNatale: No.
Mark Zandi: Is it in the-
Cris deRitis: Oh, is it unemployment insurance claims?
Marisa DiNatale: Yes.
Mark Zandi: Oh, it is, okay.
Cris deRitis: Is that-
Mark Zandi: What would that be, 614?
Cris deRitis: Increase in Washington.
Mark Zandi: Oh, DC UI claim increase.
Marisa DiNatale: No, but close.
Cris deRitis: Close.
Mark Zandi: DC, Virginia, and Maryland UI claims.
Marisa DiNatale: No.
Mark Zandi: I don't know. I give up.
Marisa DiNatale: It's the number of civilian federal workers filing unemployment insurance claims. They break that out separately.
Mark Zandi: I didn't know that. I didn't know they break that out. Always have broken that out separately?
Marisa DiNatale: Yeah.
Mark Zandi: Oh, cool.
Marisa DiNatale: And they do veterans too, military veterans separately. So this didn't change, and this hasn't really, I mean it is up from last year, but it hasn't really changed in the last couple months since DOGE has gone in and started doing all this stuff. And I think this is just testament to, again, the uncertainty of some of the status of these people that are being affected, but also the fact that if people are getting pay, if they're getting any kind of severance pay, they cannot file. I mean they can file, but they're not going to get unemployment insurance benefits, or they're going to get a reduced UI benefit if they're collecting any sort of severance pay or continuation in pay. Which my understanding is that most of the people that have been fired or put on administrative leave are being paid, at least through September is what we've heard.
So, I don't necessarily expect the direct effect of DOGE layoffs to appear sharply in the data imminently. It could be six months before we actually see it when people's pay stops being given to them in September. But it's worth watching.
Mark Zandi: Interesting.
Marisa DiNatale: And it's worth watching just looking at the DC, Maryland, Virginia UI claims in aggregate, because as I think you mentioned, Mark, I mean, this is going to have knock on effects for private sector contractors. It's going to have eventually secondary effects if they're talking about unloading a lot of real estate in the district, right? So, talk about retail and restaurants and those kinds of things that eventually will be impacted by this.
Mark Zandi: Interesting. Yeah, that makes sense. So, what you're saying is because these folks are getting some form of severance compensation, unlikely they're going to show up in the initial, in the claims data, at least for a while.
Marisa DiNatale: Right.
Mark Zandi: At least for a while, but it feels like it might affect private sector workers that cater to the federal government selling goods and services. They might be affected more quickly, so that might show up.
Marisa DiNatale: Yeah, if they're not getting any kind of severance.
Mark Zandi: I will testify from an anecdotal perspective because I have a lot of points of contact with what they euphemistically call the beltway bandits. I think that probably, I don't like that term. Like [inaudible 00:37:57].
Adam Ozimek: You call it a deep state, right?
Mark Zandi: Are you a beltway bandit?
Adam Ozimek: You mean the deep state?
Mark Zandi: I meant the deep state, yes, the deep state. Yeah, and you can feel it. You can feel it talking to them. There are layoffs already occurring among many of those organizations that typically do work for business, have business with the federal government, you can already feel it. Okay. Adam, you want to go next?
Adam Ozimek: You guys are going to get mine, it's real easy. Reflecting my not being good at this game.
Mark Zandi: Now that means we'll never get it.
Cris deRitis: That's right.
Marisa DiNatale: I know.
Cris deRitis: You jinxed it.
Adam Ozimek: 80.7.
Mark Zandi: That sounds like a labor market statistic. No?
Adam Ozimek: Yes.
Mark Zandi: That would be part of participation. No, that would be, oh, I know what it is. It's your favorite measure. It's prime age-
Adam Ozimek: That's right.
Mark Zandi: I know Adam so well, it's prime age E-pop employment population.
Adam Ozimek: Yeah, I thought it'd be apropos. [inaudible 00:38:57].
Mark Zandi: It's appropriate, it's appropriate. Yeah, you want to explain?
Adam Ozimek: It's the share of people age 25 to 54 who are employed. It sort of holds aside any sort of difficult measurement questions about whether some is unemployed or not, whether they're into labor force or not. It says, let's focus on the prime working years and let's just look at whether they're employed or not. And it's my favorite measure of labor market slack, and I worked hard for several years to convince Mark to become a proponent.
Mark Zandi: It's true.
Adam Ozimek: And I think I got you, right?
Mark Zandi: Oh, absolutely. I'm all, it's the first, the stat I look at every month when the job number comes out. Absolutely, yeah. And 80.7 would be consistent with full employment, right? Or what would you say it would be?
Adam Ozimek: No, I think we can get it above 81.
Mark Zandi: Oh, really?
Adam Ozimek: I use the late '90s, early 2000s as the benchmark. So I think we can get it above 81%.
Mark Zandi: So, you think there's slack in the labor? Oh, this goes to your point about the federal funds rate too, being a little too high.
Adam Ozimek: Yeah, it's very hard. This kind of economy where you're trying to wring out inflation, there's sort of this paradox where the labor market is kind of a source of tightness, but it's still below where you would consider full capacity.
And the example I would give is if you look at the 1980s, okay? I look at 1980 through 1995 as one long slack labor market because unemployment, inflation was marching down. It wasn't like Volcker raised rates and defeated inflation and then in 1983, we had 2% inflation for the next two decades. It took a long time for it to come down to that target level that we're at. So even throughout the '80s, I see that throughout the '80s is this period when unemployment was kept higher than it otherwise would've been, to sort of do labor market repression and to push those inflation expectations down gradually. And so, inflation didn't stay high as long, it's not comparable in that sense. But I do think there's a similar phenomenon where we're trying to wring inflation out and so you have to hold the labor market back a bit.
You can see this sort of in Larry Summer's comments that we're going to have to have unemployment surge to get inflation to come down. Now that wasn't true, right? Because we did have labor supply that could increase and that sort of helped. But I do think there is some truth to the idea of when you're trying to bring inflation down, you're already holding the labor market back. It just doesn't always manifest as outright decline, outright layoffs, it's just below sort of full capacity. So, in the world where we arrived at some sort of soft landing, interest rates can truly be at the neutral rate and normalize, I do think that our true full employment utilization rate is going to be above 80.7.
Mark Zandi: Really interesting. When's the last time we were over 81%? It has to be a long time ago.
Adam Ozimek: Early 2000s.
Mark Zandi: Early 2000s, okay.
Adam Ozimek: Yes. So I look at, the late 1990s, early 2000s is my benchmark for what full employment should and could look like.
Mark Zandi: Full employment is.
Adam Ozimek: And that's being generous because we are a lot more educated than we were then. And so for structural reasons, you might suspect that we can do even better
Mark Zandi: Well, I guess consistent with your view is wage growth continues to moderate, at least, I think, right? I mean, it feels like it's 3.5 to 4%, it feels like it's still edging lower, so consistent with the idea that there might be a little bit of slack there still in the labor market. And consistent with the idea that Federal Reserve's still trying to get inflation back to target. It's not quite there yet, so, yeah. Interesting. Let's do one more. Cris, you want to do yours?
Cris deRitis: Sure. 4.6%.
Mark Zandi: 4.6%. In the GDP?
Cris deRitis: Nope. Came out today.
Marisa DiNatale: Oh, income.
Mark Zandi: Say that again, Cris?
Cris deRitis: Came out today.
Mark Zandi: So it's the-
Marisa DiNatale: In the income release?
Cris deRitis: In the income release.
Mark Zandi: Oh, the saving rate.
Marisa DiNatale: Oh, savings rate.
Mark Zandi: Personal saving.
Cris deRitis: Personal saving rate.
Mark Zandi: Adam, who was first? Me or Marisa? Just asking.
Marisa DiNatale: I think it was between a second.
Mark Zandi: Come on, man.
Cris deRitis: You got to rewind the tape, you got to rewind the tape.
Mark Zandi: You got to be quick on this game. All right, saving rates. Oh, I meant to ask. There was a big jump in personal income, but it looked like it was non-wage income. Is that just cost of living adjustments, that kind of stuff? In the January, to Adam's point, that the January data is always a bit squirrely?
Marisa DiNatale: Yeah, because the compensation was 0.4 and it was 0.4 last month too. It was proprietor's income, rental income, transfer pay.
Mark Zandi: Yeah, it was weird stuff.
Marisa DiNatale: Big transfer payments, which should be seasonally adjusted out of there. I don't know, I'm not sure what's going on there, but it looks like a seasonal thing.
Mark Zandi: Right. Why'd you pick-
Marisa DiNatale: Yeah, the cost of living increase was 2.5%.
Mark Zandi: 2.5, right.
Marisa DiNatale: Over the year.
Mark Zandi: Yeah. Cris, why'd you pick that number, the 4.6?
Cris deRitis: It was a big jump, one, for a percentage point from the month before and highest level since June. And I think it speaks to consumers who are A, just normalizing savings rates. They've been low, they need to get back up to a more appropriate level, right? A lot of consumers, households need to replenish the savings that they exhausted. And then on top of that, I do think there's a precautionary element here. So, some of this uncertainty is going to translate into consumers, again, just sitting on their hands and that's going to help savings certainly, but at the cost of more spending, right? So that points to this idea that the economy is going to slow from here and we can already see some of that effect already in the data here.
Mark Zandi: Right. Good, let's move forward then. I don't have a statistic. I was too lazy. I've been, I don't know, somehow I missed. Usually I am very well prepared, but I don't know, maybe because we've done so many podcasts, we did a podcast yesterday, maybe that's what's going on. But anyway, I'm not prepared, so we're going to move on. But good timing anyway.
Adam, let's turn to your recent work and maybe give us a little bit of context. You're at the Economic Innovation Group, EIG. Why did you focus in on immigration and immigration policy in your work? Why is that front and center in your research right now?
Adam Ozimek: That's a great question. I think it's an area that more economists should be focused on, because there are a few characteristics of high skilled immigration that make it unique. One is it has a direct high certainty, substantial impacts on innovation and entrepreneurship. If we turn up the dial on high skilled immigration, you know that in the next year, the year and two after that, you're going to see a movement in patenting rates, in entrepreneurship rates, because they're more innovative, they're more entrepreneurial. And there's really... And industry impacts too. So you look at our attempts to catalyze a new semiconductor industry. They have huge impacts on that. Taiwan TSMC couldn't be doing what they're doing if they weren't allowed to bring in the workers that they have been allowed to to their fabs. And so you have these really important things.
Normally, if we're like, all right, we want to increase innovation in the United States, that's a hard thing to do, right? It's like, what are we going to do? Cut the corporate tax rate? Maybe. Well, maybe that'll indirectly do it or like R&D incentives. You got to structure them right and you've got these estimates of how they might work maybe eventually in the long run, increase changing at universities. These are hard levers. Entrepreneurship similarly, getting more entrepreneurship is very difficult. So, the literature is very clear that there is substantial high certainty, really known impacts of these things on these outcomes that we really care about, that are prime drivers of productivity growth.
And the other thing that sets it apart is any other policy that you think might work on those things eventually is expensive, right? R&D, expanding universities, there's no free lunch there. High skilled immigration could raise, we did a fiscal estimate of just expanding H1-Bs and just direct effects, excluding innovation effects and entrepreneurship effects. It's not hard at all to raise a trillion dollars over a decade, just by expanding skilled worker visas. And so this is a policy in a league of its own. There's nothing else like it that can move these things that we want to move that are so fundamental to growth and prosperity. And you do it, and you make money doing it. This is so-
Mark Zandi: No-brainer.
Adam Ozimek: It's such a no-brainer and it's so important, and so that's sort of what brought me to the topic.
Mark Zandi: Yeah, it makes perfect sense. Something has been bothering me and I haven't looked into it and I've not seen anyone write about it. But since the pandemic, we've seen a high level, at least from the IRS data that we follow, the EIN data, that tracks the identification numbers of new companies that form, high level of new business formation. Even to this day, it started with the pandemic and to this day, and last time I looked, it felt broad-based across lots of industries, almost everywhere in the country. The most recent data has been a little weird, more concentrated in a few states, but broad based. Have you looked at that data? Does that connect back to the immigration story? Because it does correlate with the surge in immigration that we've seen over the past several years. Do you think they're related or have you looked at that at all? I'm just curious.
Adam Ozimek: Yeah, so I think it's still a bit of a mystery.
Mark Zandi: A mystery.
Adam Ozimek: But I think that there are a few factors that are highly plausible. So one is, you had sort of a shift in geography of where people were moving a bit post-pandemic. And so when you see these areas that are seeing growth that haven't really seen a lot of growth before. My favorite example is Northeastern Pennsylvania is really seeing a ton of growth, right? People are moving there from New York City. So you have these moves from the urban cores to out of ex-urban areas and rural, and I think that's part of the story. I think remote work is part of the story. It's pro-entrepreneurship, it's easy to be an entrepreneur. Entrepreneurs, freelancers have always been more remote than regular workers. So, I think that's part of it too.
I haven't seen any research on this, but I think house prices probably play a role. There's an older literature showing that rising home prices and increased entrepreneurship via the collateral channel. If you want to start a business, having that collateral is really useful.
Mark Zandi: The owner's equity you're saying, and that built up in the house, yep.
Adam Ozimek: Yeah, I think those are part of it. Immigration possibly as well. It did sort of predate the immigration surge. It started pretty early in the pandemic, surprisingly early, but it could definitely be playing a role. I would say it hasn't really been decomposed into these various channels and maybe some other mysteries.
Mark Zandi: Yeah, I think that would be a good, something to really dig into. I know economists don't like using scatter plots, but we did do a scatter plot comparing the number of businesses that formed relative to the size of the economy on one axis. This is across, I think we did it across counties, I think we did it, it was a scatter plot against counties. And on the other axis was immigration, the immigration over the last few years, and it's visual.
Adam Ozimek: [inaudible 00:51:20].
Mark Zandi: Yeah, obviously I'm not controlling for lots of stuff, but it's very suggestive of immigration having a role here in the high formation rates that we're observing.
But let's go back to the study. One other broad question I had until we start talking about some of the impacts and some of the policy proposals that you have. Why just high skill immigration? Why not all immigration? I mean, my sort of narrative has been, and I'm totally on board with you, I think there is no better way to move the dial on the economy's potential growth rate and also address our long-term fiscal issues. Because if you get a 10th or two more on GDP growth every year, you're going to generate a lot of revenue and there'll be less spending and you address your fiscal issues in a very significant way. And that's much easier than raising taxes or cutting spending, as we're figuring out here pretty quickly. So I'm on board, but why just high skill? Why not... Are you saying that there's a... Well, I'll let you answer the question. Why high skill? Why not all skill levels?
Adam Ozimek: Yeah, so I'm still a big proponent of all kinds of immigration.
Mark Zandi: You are, okay.
Adam Ozimek: So, this isn't against low skill immigration, but I think there are two reasons. One economic and one sort of public choice. We ran a survey on immigration, we ran a few of them actually, before the election. And what we found was that 71% of people who were planning to vote for Trump, this was back in October, support more high skilled immigration. And it's extremely popular, the number is closer to 80%.
Mark Zandi: You should use that stat in the game, 71%. Of course I've would've never gotten it.
Adam Ozimek: You would've never have gotten it. Yeah, I thought about it, I thought about it, but that-
Mark Zandi: Nice.
Adam Ozimek: It is extremely bipartisan and popular, and it's not just our survey data. You can look at anyone who surveyed the public on high skill immigration specifically, and there's two reasons for that. One is that the public really doesn't like illegal immigration, that is not popular, right? And then legal low skill immigration is more mixed, it's in the middle. High skilled is super popular.
And so what ends up happening is that especially in DC you have this idea that, oh, immigration reform has to be comprehensive, it has to be comprehensive, this is the way it must be done. But you end up with Republicans and Democrats both have demands about low skill immigration, and they both think that high skill immigration is their bargaining chip. So Republicans will be like, look, we're going to give you amnesty or we're going to give you high skilled immigration, but you have to give us the border. And Democrats will be like, look, we'll give you high skilled immigration, but you've got to give us amnesty. And if it's everybody's bargaining chip, it's nobody's bargaining chip. And so it's just, low skilled and family-based immigration overall is very complicated. There's a lot of moral values issues involved there. And wherever I land on those issues, it's very, very different from a policy that is so clearly self-interested. Right? And so that's like the public choice case.
The economic argument is that when you talk about the benefit to US workers from low skilled immigration, you have to talk about complementarities, right? And I think that these are real, okay? But if you look at estimates that focus on these sort of labor elasticity based estimates, what are the spillovers of different kinds? On the negative side, you get George Borjas who's like, well, it reduced median wage growth by 0.3%. And the positive side, you get Giovanni Peri who's like, oh, well it increased median wage growth by 1%. These are not big numbers, either way, right? They do not move the dial very much for the median worker, positive or negative. Just focusing on complementarities and substitutes, that sort of very relative labor supply centric approach doesn't move the dial for the median worker, even though we know that immigrants are on the average kind of complements.
But if you look at high skilled immigration, you have numbers from over the last few decades, I think from 1990 forward, high skilled immigrants contributed 36% of the innovative output of the US economy. Now, what do you think that did to the median wage, right? Like 36%. And there's an awesome study, they looked at premature deaths of immigrants and inventors, and they looked at patenting, they looked at stock prices. Rebecca Diamond, really awesome recent study, but it's not alone in this. You can look at estimates from state-based models when the highest immigration population increases by 1%, patenting increases by 9%. Those are things that are going to really substantially move median per capita income. And that's just a totally different economic impact.
And so, that's one of the things I try to do in my paper is like, economists have got to get over this compliments substitutes focus when it comes to immigrants, because that's not where the action is, that's not where the benefits come from. That's a small thing. Even if there's truth in it, it's like moving the dial a tiny bit. These other things are just substantially, substantially changing the economy in really positive ways. So it's just I think for those reasons, you've got the economic, it's different economics, it's different politics. They should be considered separate.
Mark Zandi: You said innovation output, you used that term. How do you measure that? What does that mean, innovation output?
Adam Ozimek: So in their study, they used patents first and then they used citation-adjusted patents. And then they take this approach where they look at the impact of patenting on stock market values. And so that's how they kind of translate. Firms have a patent and lose the stock market, and you can sort of apply that to the private sector or private markets as well and you sort of scale it up.
Mark Zandi: Right, got it.
Adam Ozimek: But it's true, holding economic value, it's true even if you just look at simpler things like patenting counts, citation-adjusted patenting counts. It's like a third, it's a really, really big number.
Mark Zandi: Well, the most intuitive thing for me is just go take a look at the senior management of the Magnificent Seven and take a look at where they're from. I think they're almost all of them are immigrants, I think. Well, except for maybe Apple and Tim Cook. Right?
I mean, let's turn to the policy proposals. And right now the, correct me if I'm wrong, but the principal way we bring skilled labor into the country is through the H1-B program. But you've got some views about that program and some proposals on how to improve that. Do you want to go through that? I think the listeners would be very interested in that.
Adam Ozimek: Yeah, I think that what we really need to do, and this was the other big point of the paper, was to, don't look for a little tiny tweak or fix. Don't look for something that sounds great. Politicians love to say, "Let's staple green cards to diplomas," and that not it. I take it if that's what's on the table, I'll take it, but that is so far from ideal immigration policy.
So I start with the rethink of the economics. Why does high skilled immigration really matter? How does it actually work? And then, okay, design policy based on that, and reforming H1-B is a big part of that. So obviously, it needs to be bigger, right? It's just the number was set in the '90s, it hasn't grown since. It's way more applicants than you have H1-Bs handed out every year, it's oversubscribed. And the benefits of these workers are huge. And so the idea that we need to be carefully constraining this, it doesn't make sense. It should be much bigger.
But we should also instead of doing it by lottery, we should do it by something like age-adjusted wages, right? Someone should have to have a real job offer, you make an adjustment for how old they are because a 50-year-old who makes $200,000 a year is not as impressive as a 25-year-old who makes $200,000 a year. Their lifetime incomes are going to be different, right? And so you make a small adjustment for age and then you just use wages and that's how we should ration them out. We should give them to the people who are making most money.
So you do that, and then there's other reforms that are really important as well, like we need to make green cards to be more automatic. Uncap them, make them merit-based, right? If you're earning a high level, you should sort of be able to be automatically get a green card, get rid of the country-specific caps. And then we need to reform student visas as well. The whole system needs to be changed and smooth and supportive.
Mark Zandi: You had a catchy way of describing that visa. Maybe you mentioned it and I missed because I was a bit distracted. What do you call these visas?
Adam Ozimek: The skilled worker Visa. So we think just-
Mark Zandi: Oh, okay, it's not as snappy as I thought it was. You need a better one.
Adam Ozimek: Replace the H1. Well, it's snappier than H1-B, I think. We can [inaudible 01:00:39].
Mark Zandi: Snappier than H1-B, right, yeah. Snappier than H1-B.
Adam Ozimek: Oh, maybe you're thinking of EBX. That's our green card, that's the snap.
Mark Zandi: Oh, that's what it is. Yeah, yeah,
Adam Ozimek: Yeah. EBX is our uncapped income-based green card. If you're making over like know 75, 85 percentile of earnings, you're doing it for six years, you can self-sponsor yourself for a green card. All this fake stuff about your employer needs to prove they couldn't hire someone, it's absurd. It's absurd and it's fake and also, it comes from these myths about how immigration works. This is the problem, when economists say, "Well, immigration do jobs someone else wouldn't do." That may be a convenient rhetorical advice, but then people go try to write policy based on that assumption. They say, "Great, all you got to prove is that a native couldn't do the job."
Mark Zandi: Yeah.
Adam Ozimek: Right?
Mark Zandi: You also have a visa called a Heartland Visa. Did you want to describe that?
Adam Ozimek: Yeah, this is our place-based visa proposal. So the idea is that if counties are sort of demographically declining, they've got falling population, falling prime population and their housing mark, their house prices are relatively low, then they can opt in. The local government can opt in to the Heartland Visa, and then it's a skilled worker visa. So the skilled workers have to come and live in the Heartland Visa. But it's sort of like the skilled worker visa but it just geographically restricts where they can live. I mean, we've got such a divergence in economic geography of struggling places in the most successful sort of coastal cities. And part of it is due to where the skilled immigrants live. The most innovative skilled people want to live in those places. And so this is a chance to give other parts of the country an ability to more marginal, more immigrants into their area. And I think it could be important for development there.
Mark Zandi: Yeah, it just seems so intuitive and obvious. And as you mentioned politically, both sides kind of agree, right? I mean, what could be wrong with bringing the best and the brightest from the rest of the world here and keeping them here? Because going to create jobs and wealth and drive the train. And this is, you can see it across the globe. Just go look across the globe, look at different countries and their immigration policy, those countries that have immigrants compared to those that don't have immigrants coming into the country, there are two different stories going on here in the world. And this demographic fact is going to become even more obvious going forward, given the declining infertility rates around the world. I was just reading about South Korean fertility rates, they're through the floor. I mean, that country's going to evaporate unless something changes, unless they can address it through something like immigration policy. So, it just seems so obvious and so obvious.
So, what's wrong? I mean, is there something in your proposals that people object to or take umbrage with or say that's not going to work for some reason? Is there something that you want to point out that people put forward that suggests this just isn't going to work or is a bad idea?
Adam Ozimek: I don't think there's any, I really think it's such a strong idea, there's not really any empirical or realistic argument against the positive impacts. It all comes down to politics. And I have the hardest time in the world convincing people of the polling stuff. People just don't believe it. They think Donald Trump won the election and it's a time for reducing immigration. And the voters have spoken, they don't want immigrants. People on the left believe this too. And they're like, it's just not the time for this. You've got to be, we've do what the populists are kind of asking here.
And I try to tell these people high skilled immigration is populist. People want it, they do. I really think a lot of people have the wrong mental model of immigration opposition. I think they think if people oppose immigrants, they are racist and xenophobic and therefore, it's unconditional. Right? They just oppose immigration. That's what Trump ran on, opposing immigration, it applies evenly. But people really, even in older public science literature on this show that people, they don't oppose immigrants. They sort of stereotype immigrants and then oppose them based on those stereotypes.
So if you tell people there are two immigrants, one from Mexico and one from Germany, and you sort of describe their economic characteristics and they're equal, people don't have a preference for one or the other, generally. They see them as being relatively equal, right? And that's kind of where you'd expect racist-based explanations to show up or xenophobic-based explanations to show up. But then if you just say, well, would you prefer a German or a Mexican immigrant? Then you see this difference, and the difference emerges because of negative stereotypes about how these immigrants are different. Right? And so it's not not racism, but it's different. It's a different kind of opposition.
And so when you tell people we are going to have a policy here that's focused on high-skilled people and it's only going to land in high-skilled people, even people who are otherwise negative about immigrants because they're stereotyping them, who otherwise are very concerned about the border or whatever, a lot of those people say, "Yeah, great. We want high-skilled people. We want them of all stripes." So, I think it's, people aren't getting into the heads of immigration opposition. They're sort of really crudely interpreting this populist movement incorrectly.
Mark Zandi: Well, it seems like ironically the best person to push this policy forward would be President Trump. It's kind of Nixon going to China, he's got the cred here in terms of anti-immigration. So if he says, "Look, I've got the border under control. Let's get the best and the brightest," and I've heard him kind of say that in the past.
Adam Ozimek: Oh, yeah.
Mark Zandi: Something to those effect.
Adam Ozimek: He wants the big beautiful door. He wants to close the border,
Mark Zandi: Oh, there you go. A big, beautiful, yeah,
Adam Ozimek: Close the border, but put a big beautiful door in there. He's said plenty of... And what's interesting is, he actually, in his recent description of H1-B visas, not only was he positive about them, but he actually got the economics of it right in a kind of nuanced way. He said, "Look, you let the skilled workers in and not only are they doing a job here, but then the business expands and then they hire other people, and that sort of takes care of everyone else." So that's a very nuanced understanding of immigration, it's not a fixed pie. And so I think he does get that. And there are a lot of tech people in his orbit that get it, but we'll see what happens there.
You have to acknowledge also that in his previous term he didn't do anything about it. If anything, he sort of restricted high-skilled immigration and didn't help there. So, I think part of him gets it, but there's people in his administration who are also not pro-high-skilled immigration.
Mark Zandi: Yeah, I will say though that I totally agree with you. It's so obvious, it's so obvious. And when it's so obvious it's going to happen, it's just a matter of time. You're just going to get a political window at some point in time. Maybe it's after the border is complete. You have to control the border, you have to nail that thing down, so that that's not what people focus on when they think immigration. If that goes away as an issue in people's minds, then this becomes much more viable. And then in the context of our own demographics, I mean, our own native born population is, it's going to go negative here, in terms of working age population, just that's inexorable, that's going to happen, and the pressure on businesses is going to intensify. And then I would think the political opposition from the general population will evaporate as well, because there won't be issues with regard to jobs and wages. There'll be a tight labor market and we get a window, but, and I keep going back to our fiscal situation.
We're here battling over things like cutting Medicaid or trying to cut taxes for businesses. But if we really want to address our fiscal situation in a way that is politically viable and really move the dial in a reasonable amount of time, it's allowing for more high skilled immigrants into the country. There's no other better solution than that, in my view. So, I think you're just dead on.
I did want to end the conversation about going around the table and seeing what people's probability of recession are. We haven't done that in a while in the context of the recent data. But before I do that, maybe Cris and Marisa, I'll turn it back to you. Anything you want to push back on or you can see I'm a proselytizer here on this issue. I totally agree with Adam on this. Any pushback on this or anything you want to call out? I'll go to you, Cris, first.
Cris deRitis: As an immigrant myself, I'm all for it. So there's no opposition.
Adam Ozimek: And a skilled one, at that.
Cris deRitis: No opposition here.
Mark Zandi: No opposition there. And Marisa?
Marisa DiNatale: Just a question, Adam, about the Heartland Visa, right? Is there enough supply of jobs? Is there demand for high skilled labor in some of these non-coastal, Midwestern, middle of the country areas? Is it a chicken and egg kind of thing that this happens or can you explain a little bit more about that? The regional placement of immigrants, high skilled immigrants?
Adam Ozimek: Yeah, so I don't see the pie as kind of being fixed. And I think that if there's one thing that sort of creates its own demand, it's human capital. And as you let in more skilled immigrants, that sort of increases opportunities for businesses to invest in those places.
Let me give you a concrete example. So, if we fix the H1-B system so that it's no longer done by lottery, the industry that's going to be really hurt by this is the IT consulting industry, right? Infosys, Tata, all those guys, they really depend on the lottery. They're like the lowest paying H1-B employers. One thing that I think would happen is, you fix H1-B, that is an industry that now can relocate to... They don't have to go away, they just relocate to Heartland Visa areas.
And so if you are looking at Buffalo, for example, as an employer, and you say, do I put my next office in Chicago or do I put it in Buffalo? Well, if I put it in Buffalo, I have a really easy, readily available supply to skilled workers from all over the world. That changes how you think about that place. And so I think the Tata's and the InfoSys's of the world would be really probably first movers at that, but there's tons of other opportunities as well.
The other thing to know about is, it would be both of our skilled visas and our H1-B, or our skilled visas and our Heartland Visas would allow them to work as entrepreneurs. Right now, it's very difficult to come here on an H1-B and do any sort of entrepreneurial activity. So, immigrants are very entrepreneurial, they create their own opportunity. And so, allowing them to work in that way I think will help increase the demand for work in those areas.
Mark Zandi: Okay. Well, great study. We'll post it to the notes to the podcast. And I know you also have done a lot of work in the housing area, but we're going to have to have you back to talk about that, because I didn't know that. You sent me the link and I was just perusing it, some really interesting ideas. And there's a big link between immigration and housing, so, we might want to talk about that.
But let's end the conversation back to the economy, given all the things that are going on. And kind of the way we've been encapsulating our general thinking about things is, what is the probability the economy is going to enter into a recession at some point in the next 12 months, let's say 2025 going into 2026? And I'll just go around the table and begin with you, Marisa. What's the probability of recession in the next 12 months?
Marisa DiNatale: A third.
Mark Zandi: A third? That's up. You were-
Marisa DiNatale: Well, you asked this, I forget when the last time we did this. It was-
Cris deRitis: A couple weeks ago, not too long ago.
Marisa DiNatale: Yeah, and I think I was at like 30.
Mark Zandi: 30.
Cris deRitis: I thought you were higher.
Marisa DiNatale: So yeah, it's gone up.
Mark Zandi: A third. Okay. Okay, Cris?
Cris deRitis: I'm at a third.
Mark Zandi: A third. And you were also at 30, I think
Cris deRitis: I was at 30, yes. So, I'll just bump it up a little.
Mark Zandi: What was your low, Marisa, in the cycle? What was your low?
Marisa DiNatale: I really need to [inaudible 01:13:46].
Mark Zandi: I think you were 15.
Marisa DiNatale: No, I don't think I ever was at 15.
Mark Zandi: Never got to 15.
Marisa DiNatale: I think maybe I was down to like 20.
Mark Zandi: Yeah, okay. 15 being kind of the unconditional probability.
Marisa DiNatale: Yeah, you were at 15 recently.
Mark Zandi: Yeah, I was at 15. I was at that low, yeah. Cris, what was your low? You are always a bear.
Cris deRitis: Like 25.
Mark Zandi: 25, yeah, 25. Adam, I'm putting you on the spot. I know you don't do this for a living, but do you have a view? Can you capsulate it in the probability of recession?
Adam Ozimek: Yeah, I'll put it at 20.
Mark Zandi: 20.
Adam Ozimek: Yeah, I think we have to be... I agree with Marisa on the fragility of the economy, but I don't see the correction. I don't see an economy that's growing below potential and being restricted by policy as necessarily one that tips into recession.
I would point to 2018 as a time when Trump was going wild on his trade war, right? The Fed had raised interest rates too high. You remember they had to cut them because they were wrong about where the neutral rate was and they were discovering that. Uncertainty was high, and you could see the economy slowing. You could just see the housing market just take a breather, right? And job growth slowed, but we never went into a recession. It was all of the things that are happening now, including the restrictive monetary policy, they were all present and we still didn't end up on a recession. So I don't think it's necessarily the case that even if you think all of these bad things kind of manifest, that it pushes us into a recession. So, I'm still at 20%
Mark Zandi: Just a food for thought, Adam, on your point about President Trump's first term. We don't know what the counterfactual is. I mean, if there had not been a pandemic, I think there was a pretty good probability we'd go into recession. Pretty good probability.
Adam Ozimek: Oh, I'm total other side of that, if there had not been a pandemic, we would've seen positive effects from a full employment economy that people did not think. I think the productivity growth would've been really strong, I believe in the Verdoorn's law story of full employment and productivity growth. I think we were heading to a really great place.
Mark Zandi: Well, that-
Adam Ozimek: He could always do it, right? He could always choose to push us into a recession. So, you are to a certain extent forecasting his behaviors, but I think-
Mark Zandi: I think the die was cast. I think the die was cast. I mean, remember the yield curve inverted in-
Adam Ozimek: [inaudible 01:16:26], because the Fed was lowering rate. Mark, that was because the Fed was making a mistake. The Fed was making a mistake. Don't you remember my [inaudible 01:16:33]?
Mark Zandi: This is what I missed when he and left us, and now I don't get these kind arguments anymore. Hey, but let me ask one more question about the yield curve. Obviously the yield curve, this last go around inverted and we didn't get in recession. Here we are back around again, the curve inverted, I think, is it still inverted, Cris? I don't know.
Cris deRitis: Yeah, but it's... yeah, it just-
Mark Zandi: It's small, I know it's small in the grand scheme of things.
Cris deRitis: Yeah, but it did.
Mark Zandi: Did we put more weight on the curve as a recession indicator this go around than we did a couple, three years ago? I mean, I never bought into that and I argued against it and didn't think we were going to have a recession, and I'm still not arguing for a recession now. Oh, by the way, I'm at 30%. I think there's a 30% probability. And I'm up.
Cris deRitis: You're up.
Mark Zandi: I was 15, but I think the uncertainty is palpable. And there is a... Adam, go listen to that podcast from yesterday with the [inaudible 01:17:27] from Breitbart. The one thing I took away from that was that President Trump is not going to be as sensitive to the economy and the stock market as he has historically, he's committed to these policies. And if you're committed to broad-based tariffs, I don't know, just feels like the prescription for a problem.
Adam Ozimek: I like John Carney a lot. John's a nice guy, but he tends to think that his view of the world is Trump's view of the world. A lot of people want to believe that Trump's view of the world is their view of the world, that he's embraced their-
Mark Zandi: Fair enough.
Adam Ozimek: They have this esoteric theory and no, no, Trump has the same sort of esoteric theory of how things work. I don't think that's the case.
Mark Zandi: Okay, okay. We're going to have to call this a podcast, but there's a lot to talk about and we'll schedule the next conversation, Adam, if you're up for it, and we'll-
Adam Ozimek: Absolutely
Mark Zandi: ... go deep on housing. By the way, do you have any views on Fannie Mae and Freddie Mack? Just asking real quick.
Adam Ozimek: No, I don't, no.
Mark Zandi: Damn, that would be fun.
Adam Ozimek: That's for you, Mark. I leave that one, if I had that question I would ask you.
Mark Zandi: That'd be fun too.
Cris deRitis: You should get some.
Mark Zandi: We should get some, get some for the next conversation. Yeah, yeah. Anyway, thanks so much, Adam. It was really always a pleasure. I very much enjoy your insight and great conversation.
Adam Ozimek: Thanks for having me. Always glad to be here, happy to come back anytime.
Mark Zandi: Great. And dear listener, hopefully you enjoyed that and we're going to call this a podcast. Take care now.